Explanation

This risk was not identified in the FDD package. High franchisee turnover, indicated by a large number of terminations, non-renewals, or closures in Item 20, is a major red flag for systemic problems. CFFC's Item 20 data shows very low turnover over the past three years, with only one termination in 2023 and 2024 each, and one non-renewal in 2022, against a growing system. This suggests a stable franchisee base.

Potential Mitigations

• Your business advisor can help you calculate the annual turnover rate from Item 20 data to compare against industry benchmarks.
• Engaging an attorney to help you formulate questions for former franchisees is a valuable step in understanding why they left the system.
• An accountant can assist in reviewing the context of any disclosed turnover to assess its potential impact on system health.

Explanation

This risk was not identified. The franchise system has shown steady and managed growth over the last three years, expanding from 69 to 86 franchised outlets from the start of 2022 to the end of 2024. This rate of growth does not appear to be excessively rapid or suggest that the franchisor's support resources would be unduly strained. This indicates a potentially stable and sustainable expansion strategy.

Potential Mitigations

• Your business advisor can help you analyze growth trends in Item 20 against the franchisor's support capabilities described in Item 11.
• It is still prudent to ask current franchisees about the quality and timeliness of support as the system has expanded.
• An accountant can review the financial statements in Item 21 to evaluate if the franchisor is investing in infrastructure to support its growth.

Explanation

This risk was not identified. CFFC has been franchising since December 1985 and its predecessor has been operating since 1983, as disclosed in Item 1. The management team detailed in Item 2 also has extensive, long-term experience with the company. The franchise system is mature and well-established, not a new or unproven concept. This long history suggests the business model has demonstrated long-term viability.

Potential Mitigations

• When evaluating a newer system, it is crucial to have an attorney scrutinize the business and franchising experience of its management team in Item 2.
• A business advisor can help you assess the viability and track record of a young or unproven franchise concept.
• An accountant should carefully review the financials of a new franchisor for adequate capitalization.

Explanation

This risk was not identified. The business, custom closets and storage systems, has been in operation since 1983 and franchising since 1985. This demonstrates a long history of consumer demand and suggests the business is not a short-term fad. The concept is tied to the enduring home organization and improvement industry, indicating long-term market relevance.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry to assess whether a concept is a sustainable business or a potential fad.
• In any franchise, you should evaluate the franchisor's commitment to research and development in Item 11 to see how they plan to adapt to changing consumer tastes.
• Discussing the long-term outlook for the industry with a financial advisor is a prudent step.

Explanation

This risk was not identified. Item 2 of the FDD shows that the key executives have extensive, long-term experience with CFFC and its predecessor, some since the 1980s and 1990s. This indicates a deeply experienced management team that is very familiar with both the industry and the franchise system's operations, which is a positive factor for franchisee support and system stability.

Potential Mitigations

• A thorough review of the executive experience outlined in Item 2 with your business advisor is critical when evaluating any franchise.
• It is always beneficial to speak with current franchisees to gauge their opinion of the management team's competence and support.
• An attorney can help investigate the background of key personnel if any concerns arise from the FDD disclosures.

Explanation

This risk was not identified. Item 1 does not indicate that CFFC is owned by a private equity firm. The company appears to be privately held by its long-standing management team. This suggests that business decisions may be focused on the long-term health of the brand and its franchisees rather than short-term investor returns, which can be a risk associated with private equity ownership.

Potential Mitigations

• It's important to have your attorney investigate the franchisor's ownership structure as disclosed in Item 1.
• If a private equity firm is involved, a business advisor can help research the firm’s reputation and track record with other franchise brands.
• When PE ownership is present, asking existing franchisees about any changes in system direction or support levels is a key due diligence step.

Explanation

This risk was not identified. CFFC discloses its parent/predecessor/affiliate relationships in Item 1. The key affiliate, The Closet Factory, Inc. (TCFI), which operates the company-owned stores and provides resources to CFFC, is owned by the same shareholders. While CFFC provides its own audited financial statements, the significant financial interdependency with TCFI is disclosed, though TCFI's own financials are not included. The risk stems from the dependency itself, which is disclosed.

Potential Mitigations

• Your accountant should carefully analyze the nature and extent of any disclosed affiliate relationships and financial interdependencies.
• An attorney can help you understand the implications of any guarantees or support obligations between the franchisor and its parent or affiliates.
• If a parent's financials are required but not provided, your attorney can advise on the potential disclosure violation.

Explanation

This risk was not identified. Item 1 clearly discloses the franchisor's predecessor, The Closet Factory, Inc. (CFI), and describes the relationship between the entities. The FDD appears to integrate the history of the predecessor and the current franchisor without downplaying or obscuring historical information regarding litigation (Item 3) or bankruptcy (Item 4), both of which are disclosed as having no reportable events.

Potential Mitigations

• An attorney should always review Item 1 carefully to understand the full history of the system, including any predecessors.
• It is wise to ask long-term franchisees about their experiences under any previous ownership or predecessor entities.
• A business advisor can assist in independently researching a predecessor's history if there are signs of incomplete disclosure.

Explanation

This risk was not identified. Item 3 of the FDD states, 'No litigation is required to be disclosed in this Item.' This indicates an absence of the type of material litigation involving the franchisor, its predecessors, or key personnel (such as franchisee claims of fraud or franchise law violations) that would be a significant red flag. A clean litigation history is a positive indicator of the franchisor-franchisee relationship.

Potential Mitigations

• Even with a clean Item 3, it is prudent to have an attorney conduct a public records search for any other litigation involving the franchisor.
• A business advisor can help you ask current and former franchisees about their experiences and whether they have had disputes with the franchisor.
• An attorney can explain the specific types of litigation that are material and must be disclosed under franchise law.